The year 2020 has been extremely unkind to retailers, restaurants, and other businesses. Restrictions during the early stages of the coronavirus pandemic put many operations in a position where their revenue dropped drastically or dried up completely. And even once those businesses were allowed to reopen, operating restrictions have created a nightmare and perpetuated that revenue crunch.
The result? Many retailers and smaller establishments can't pay rent, or at least not in full, until revenue picks up or a substantial amount of government aid comes through. (To be clear, the Paycheck Protection Program mostly gave small businesses funds to use to cover payroll, but only a small percentage of those loans could be used for rent and overhead to qualify for forgiveness.)
All of this is impacting commercial landlords, who rely on rental revenue to pay their own mortgages. But it's not just commercial landlords who are getting hurt in all of this mess. Some residential buildings are feeling the impact, too.
Residential buildings that house businesses are hurting
In some areas, it's not uncommon for a residential building to house a commercial tenant. In New York City, for example, many condo and co-op buildings have cafes or stores adjacent to their lobbies. It's a great way for those buildings to generate revenue, thereby easing the burden on residents.
If a business pays enough rent, it could offset operating costs for the building, thereby keeping dues to a minimum. In fact, some New York City residential buildings cover as much as 15% of their annual budgets with rental income from commercial tenants.
The problem right now, however, is that a lot of those commercial tenants aren't paying -- because they can't. And as such, condo and co-op owners are seeing their own expenses rise. Not only that, but property values have been declining in New York City in particular, so condo and co-op owners may now be facing a double whammy: higher dues and lower sale prices for those looking to unload their investments.
And that's not the only problem. Many businesses struggling today will, inevitably, be forced to close down for good. That could, in turn, leave many residential buildings with vacancies on their hands. That could not only impact revenue but also property value. After all, nothing shouts "stay away" like a boarded-up storefront.
Furthermore, finding replacement tenants is no longer the relatively easy task it once was in cities like New York, so residential buildings with commercial tenant vacancies may be stuck in that situation for months, or even years.
A potential red flag
Right now, residential units in New York City can be had at a discount. But investors should be wary when buying a condo or co-op in a building with commercial space -- especially if that space is currently vacant. And if there is a commercial tenant, prospective buyers should ask questions about its viability: Is that restaurant or retail store current on rent? If not, how far behind is it?
While small businesses may see revenue pick up once things improve on the coronavirus front, condo and co-op owners could end up shelling out a lot more money out of pocket until that happens. That's something potential buyers need to keep in mind -- even if home prices are overwhelmingly attractive.